In a recent decision, Federal National Mortgage Association v. Thompson, 2018 WI 57, the Wisconsin Supreme Court held that when a lender does not validly accelerate payment of the amount due under a note and a foreclosure action brought on the borrower’s default under the note has been dismissed with prejudice, claim preclusion does not bar the lender from bringing a subsequent foreclosure action based upon the borrower’s continuing default on the same note.
In Thompson, a lender filed a foreclosure lawsuit against Thompson alleging his failure to make payments under a note. At trial, the circuit court dismissed the foreclosure action with prejudice, finding that that the lender failed to present sufficient evidence of the original notice to accelerate full payment and that the lender was in possession of the original wet-ink note. After the dismissal of the foreclosure action, the lender sent Thompson a notice of intent to accelerate payment of the note and subsequently filed a second foreclosure suit against him as he continued to fail making payments under the note. Thompson defended by arguing that because the lender’s claims had already been litigated, the doctrine of claim preclusion barred the lender’s second foreclosure action. The trial court held that the claim preclusion doctrine did not bar the lender’s second action relating to Thompson’s defaults occurring after the dismissal of the first foreclosure action. Subsequently, the lender prevailed at trial and the circuit court entered a monetary judgment against Thompson. Thompson appealed, and the Court of Appeals certified the issue to the Wisconsin Supreme Court.
The Supreme Court affirmed the decision of the circuit court. In Wisconsin, claim preclusion bars a subsequent action when the following three elements are present: 1) an identity between the parties in both suits; 2) an identity between the causes of action in both suits; and 3) a final judgment on the merits. The Supreme Court noted that only the second element of claim preclusion was at issue, that is, whether there was an identity between causes of actions in both foreclosure actions. The Supreme Court then concluded that the second element of claim preclusion was lacking as both foreclosure actions did not share a “common nucleus of operative facts”. The Supreme Court explained that each lawsuit related to different sets of operative facts, namely, Thompson’s defaults occurring at different times.
Further, the Supreme Court also rejected Thompson’s claim preclusion argument because unlike the second lawsuit, where the debt was properly accelerated, in the first action, no such acceleration took place. The Supreme Court explained that because it was never proven in the first lawsuit that Thompson was in default, the note could not be validly accelerated. The Supreme Court noted that after the first lawsuit was dismissed, the parties were placed back in the position they held before the commencement of the suit. Accordingly, “Thompson was obligated to continue making installment payments after the dismissal of [the first] lawsuit, and claim preclusion [did] not prevent [the lender] from suing Thompson for failing to make those payments”. Id., ¶47.
The Supreme Court also rejected Thompson’s challenges that the circuit court erred by admitting a copy of the note into evidence at trial. The Supreme Court noted that the lender’s counsel presented the original wet-ink note to the circuit court along with a copy of the note, and the trial court judge sitting as a fact-finder determined that the purported original note appeared to be the original wet-ink note. The Supreme Court concluded that the circuit court did not err in admitting a copy of the original wet-ink note into evidence at trial.
The Thompson decision is reassuring for lenders as it stands for the proposition that even if a lender errs in the foreclosure action by not accelerating the amount due, the lender can later pursue a new foreclosure action if the borrower’s default on the note continues. Indeed, under the holding of Thompson, a borrower will not receive a “free” house for life if he or she continues to fail making payments under the note, regardless of the lender’s failure to accelerate the debt in the prior foreclosure action.
If you are interested in discussing how Michael Best can assist with foreclosure issues, please contact your Michael Best attorney, or Victor J. Allen.